How much people should pay out-of-pocket for health care is a much-debated issue in health policy. New health insurance products with higher out-of-pocket shares are becoming more evident in the private market, and some states are considering ways to increase enrollee financial responsibility in state Medicaid programs. This paper presents information about current out-of-pocket spending by individuals with the purpose of providing context for future health policy discussions.

Current proposals suggest that increasing the amount that people must pay directly out-of-pocket for their health care at the point of service will encourage them to make more efficient and better health care decisions, leading to an overall reduction in health care expenditures. Discussions about out-of-pocket responsibility often focus on the overall percentage of health expenditures that are paid out-of-pocket — roughly 20% based on the 2003 Medical Expenditure Panel Survey (MEPS).1 There is, however, considerable variation in the amounts and percentages that people pay out-of-pocket for health care today. The paper breaks out total and out-of-pocket expenditures along several dimensions, including level of spending, service type and poverty level for two population groups — all people and nonelderly people with private health insurance.2 Our goal is to enhance public understanding of how total and out-of-pocket health care expenditures are distributed across the population.

The information below is based on data from the 2003 Medical Expenditure Panel Survey (MEPS), Household Component. MEPS is a national probability survey of the U.S. civilian population residing outside of institutions, conducted by the Agency for Healthcare Research and Quality. The survey provides detailed information on the demographic characteristics, health care use and health care expenditures costs for this population. See http://www.meps.ahrq.gov/Puf/PufDetail.asp?ID=194/ for additional description of the 2003 MEPS consolidated file.

This paper focuses on expenditures paid for health care services and not on premiums paid by families. Current discussions about changing health benefit design focus on out-of-pocket payments for services, so this paper looks at out-of-pocket costs in that context. Premium payments are clearly an important part in considering the overall out-of-pocket health care burden on families (and premium levels will interact with changes in benefit design). We will be looking at the broader issue of overall out-of-pocket burden and family budgets in later work.

Share of Total Expenditures Paid Out-of-Pocket

Figure 1 shows that about 20% of total health expenditures are paid out-of-pocket. This percentage is consistent across the two populations presented here.3

Average Out-of-Pocket Share

Figure 2 shows the percentage of expenditures that the average person who has spending on health care pays out-of-pocket, which is 35% and 34% for each of the two populations. These percentages are higher than the 20% and 19% presented above because health expenditures are not distributed evenly across the population — a small percentage of people account for most health expenditures, and these high spenders have relatively low out-of-pocket shares. More information on out-of-pocket shares by level of total spending is presented below.

Out-of-Pocket Shares By Poverty Level

Figure 3 shows that, among people with health spending, the average out-of-pocket share for people under poverty is somewhat lower (28% v. 35-36%) for all people than the average out-of-pocket share above poverty. This difference may result from cost sharing protection provided for some of the poor by Medicaid and other public programs. Average out-of-pocket shares do not vary by family poverty level for the nonelderly group with private insurance.

Out-of-Pocket Shares by Level of Total Spending

A relatively small percentage of the population accounts for most health expenditures — the 5 percent with the highest spending account for about 49% of the total health expenditures, while the 20 percent with the highest spending account for around 80% of total expenditures.4 This distribution does not vary considerably by population group.

As Figure 4 shows, out-of-pocket spending accounts for a smaller proportion of total spending as the overall level of spending on health increases. Figure 4 shows average out-of-pocket shares for people based on their level of overall health spending.5 For example, looking at all people, the one percent with the highest health care spending had an average out-of-pocket share of seven percent and the four percent of people with the next highest level of spending (between one and five percent) had an average out-of-pocket share of 13%. There are several potential reasons for this pattern — high spenders are more likely to exceed the maximum out-of-pocket limits in their insurance, after which most of their costs are completely covered, low spenders are likely to have more of their spending in the deductible portion of their coverage, and high spenders are more likely to be using services, such as hospital care, where the out-of-pocket share of expenditures tends to be low (see next section).6Figure 5 shows the corresponding average out of pocket spending amounts by percentile of health spending. Note that the people with the lowest average out of pocket spending are still paying a substantial amount out-of-pocket because of their high overall spending. 7

Out-of-Pocket Shares by Type of Service

Public and private insurance plans vary their coverage and payment arrangements by type of health care service, resulting in differences in the share of expenses that are paid out-of-pocket by people for different services. Figure 6 shows the share that the average person with expenses in a health category pays out-of-pocket for health care services in that category. (Figure 6 shows information for all people; for comparable information for the nonelderly with private insurance) As the figure shows, out-of-pocket shares are low for inpatient and outpatient hospital services, which are relatively expensive, and higher for office-based, prescription drugs and other services.

Table 1 shows the same information broken out by people’s level of spending.8People with the highest expenditures on average pay relatively low shares of the costs for hospital, outpatient and office-based services; the average out-of-pocket shares for these services tend to rise as overall spending falls. People at all spending levels on average pay a relatively high share of the costs for prescription drugs, dental and vision services. (Table 1 provides information for all people by spending category; for comparable information for the nonelderly with private health insurance)

Table 1: Average Share Paid Out-of-Pocket by People with Health Spending,
by Type of Service and Spending Level, All People, 2003

Type of Service

Out of Pocket Contribution to Total Health Spending in that category

in top 5%

Hospital

2%

Outpatient

5%

Office Based Visit

12%

Prescription Drugs

49%

Emergency Room

5%

Dental

50%

Home Health

13%

Vision

70%

Other Health Care

38%

in top 10% to 5%

Hospital

5%

Outpatient

9%

Office Based Visit

17%

Prescription Drugs

49%

Emergency Room

8%

Dental

52%

Home Health

13%

Vision

71%

Other Health Care

49%

in top 20% to 10%

Hospital

5%

Outpatient

9%

Office Based Visit

20%

Prescription Drugs

49%

Emergency Room

11%

Dental

48%

Home Health

33%

Vision

73%

Other Health Care

54%

in bottom 80%

Hospital

16%

Outpatient

15%

Office Based Visit

29%

Prescription Drugs

56%

Emergency Room

18%

Dental

39%

Home Health

33%

Vision

75%

Other Health Care

60%

Proportion Each Category of Service Adds to Average Person’s Out-of-Pocket Spending

Figure 7 shows how out-of-pocket spending is distributed to the average person with health care spending. Just over 40% of the average person’s out-of-pocket spending is for prescription drugs, and another quarter is for office-based visits. (Figure 7 shows information for all people; for comparable information for the nonelderly with private insurance)

Table 2 shows the same information broken out by people’s level of spending. For the people with the highest spending, hospital out-of-pocket spending makes up a larger share of their average out-of-pocket expenditures than it does for the people in lower spending categories. This is not surprising because people in the highest spending category have more hospitalizations on average and longer average hospital stays than people who spend less. For the average person in all spending categories, however, out-of-pocket spending for prescription drugs makes up the largest share of their out-of-pocket spending. (Table 2 provides information for all people by spending level; for comparable information for the non-elderly with private health insurance)

Table 2: Distribution of Out-of-Pocket Spending for Average Person with Health Spending,
by Spending Level, All People, 2003.

Type of Service

Service Out of Pocket Contribution to Total Out-of-Pocket Spending

in top 5%

Hospital

9%

Outpatient

4%

Office Based Visit

14%

Prescription Drugs

57%

Emergency Room

1%

Dental

7%

Home Health

2%

Vision

2%

Other Health Care

3%

in top 10% to 5%

Hospital

5%

Outpatient

5%

Office Based Visit

19%

Prescription Drugs

51%

Emergency Room

2%

Dental

12%

Home Health

1%

Vision

3%

Other Health Care

2%

in top 20% to 10%

Hospital

3%

Outpatient

4%

Office Based Visit

19%

Prescription Drugs

50%

Emergency Room

2%

Dental

17%

Home Health

0%

Vision

4%

Other Health Care

1%

in bottom 80%

Hospital

0%

Outpatient

1%

Office Based Visit

29%

Prescription Drugs

39%

Emergency Room

3%

Dental

19%

Home Health

0%

Vision

8%

Other Health Care

1%

Table 1a: Average Share Paid Out-of-Pocket by People with Health Spending,
by Type of Service and Spending Level, Nonelderly with Private Insurance, 2003

Type of Service

Out of Pocket Contribution to Total Health Spending in that category

in top 5%

Hospital

3%

Outpatient

7%

Office Based Visit

17%

Prescription Drugs

43%

Emergency Room

7%

Dental

40%

Home Health

10%

Vision

76%

Other Health Care

45%

in top 10% to 5%

Hospital

4%

Outpatient

11%

Office Based Visit

22%

Prescription Drugs

45%

Emergency Room

11%

Dental

41%

Home Health

17%

Vision

75%

Other Health Care

52%

in top 20% to 10%

Hospital

6%

Outpatient

11%

Office Based Visit

24%

Prescription Drugs

45%

Emergency Room

14%

Dental

41%

Home Health

50%

Vision

76%

Other Health Care

60%

in bottom 80%

Hospital

7%

Outpatient

17%

Office Based Visit

30%

Prescription Drugs

54%

Emergency Room

16%

Dental

35%

Home Health

59%

Vision

76%

Other Health Care

64%

Table 2a: Distribution of Out-of-Pocket Spending for Average Person with Health Spending,
by Spending Level, Nonelderly with Private Insurance, 2003.

Type of Service

Service Out of Pocket Contribution to Total Out-of-Pocket Spending

in top 5%

Hospital

12%

Outpatient

7%

Office Based Visit

23%

Prescription Drugs

40%

Emergency Room

2%

Dental

11%

Home Health

0%

Vision

3%

Other Health Care

2%

in top 10% to 5%

Hospital

5%

Outpatient

6%

Office Based Visit

24%

Prescription Drugs

41%

Emergency Room

3%

Dental

16%

Home Health

0%

Vision

4%

Other Health Care

1%

in top 20% to 10%

Hospital

2%

Outpatient

5%

Office Based Visit

24%

Prescription Drugs

39%

Emergency Room

3%

Dental

22%

Home Health

0%

Vision

5%

Other Health Care

1%

in bottom 80%

Hospital

0%

Outpatient

1%

Office Based Visit

33%

Prescription Drugs

33%

Emergency Room

2%

Dental

21%

Home Health

0%

Vision

8%

Other Health Care

0%

Notes:

1. The estimated percentage of out-of-pocket spending for personal health care published by the Centers for Medicaid and Medicare Services for the National Health Accounts (NHA) is slightly lower at 15% in 2004. The NHA estimate accounts for some expenditures not included in MEPS, such as nursing home care and other institutional settings. (See Borger et al, Health Spending Projections Through 2015. Health Affairs 25(2006): w61-w73. Accessed at:http://content.healthaffairs.org/cgi/reprint/hlthaff.25.w61v1.pdf)

2. Nonelderly with private health insurance are people who are age 64 and under and have more than six months of either of these three general types of coverage: 1) private employer group or TRICARE; 2) private nongroup or private self employed group of one; or 3) private other group, private don’t know, or private coverage from someone outside of the household.

3. The category “health coverage and other sources” includes any spending by Medicare, Medicaid, private insurance, Veteran’s Administration, TRICARE, other federal sources, other state and local sources, workers’ compensation, other private, other public, or other unclassified sources.

5. Spending levels are calculated in a multi-step process. First we identify the expenditure values that are associated with the following percentiles: 99%, 95%, 90%, and 80%. For instance, the 99 th percentile of spending for all people is $36,278. People whose expenditures are at that level or higher are considered to be in the top 1% of spending. We identified people in the 5% to 1% (but not including 1%) spending category by using the expenditure level associated with the top 95 th percentile of spending (those who spend at least $12,041) and subtracting out those who spend $36,278 or more. This process continues until all people have been grouped according to spending level. People with no (zero) expenditures in the year fall in the ‘lowest 80 th percentile of health spending’.

6. People with no (zero) health expenditures are included in the calculation of percentiles of health spending (see footnote #5) but only people with health expenditures are included when calculating the percentage of expenditures that are out-of-pocket.

7. People with no (zero) health expenditures are not included in the average out-of-pocket spending amounts.

8. As noted earlier, people with no (zero) health expenditures are included in the calculation of percentiles of health spending (see footnote #5) but only people with health expenditures are included when calculating the percentage of expenditures that are out-of-pocket.